Arnold Kling  

Tyler Cowen Explains Systemic Risk

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If your banks are less risky, often something else is more risky, and vice versa.


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floccina writes:

If your banks are less risky, often something else is more risky, and vice versa.

It seems that there was too much risk and corruption in the system. I wonder if that is due to the fact that we had a very long relatively stable period. It might be inevitable that long stable periods lead to such. Perhaps what keeps people from too much risk is the fresh are the vivid memories of routed risk takers. (BTW Wall Street has been having scandal after scandal for as long as I can remember. That is one reason I would like to see most of the investment banks go out of business maybe they would be replaced by something better, creative destruction you know. Periods like this might be what are needed for startups to be able to challenge powerful, entrenched interests.

Also more and more it looks to me like government can make the decline less severe but at the cost of making it last longer. I think that the only thing to do would be to let all the failing banks and entities be liquidated. In the extreme people may be shocked into money disillusionment (my mom used to say disillusionment is good because it means that you were living under an illusion). Wage earners may be able to ignore a 15% deflation concentrating the costs on the 10%-20% who loose their jobs but a 50% deflation may allow wages to be cut top to bottom. It might be like tearing off the band aid quickly. If you hit bottom quickly perhaps you can recover quickly. Companies and people with too much debt might be wiped out but entities with money might see valve apart from money values and start buying and using the assets. It might shock us out of our complacency.

An argument against letting the bank fail might be that the risks of unrest and radical overthrow are too great to let things get that bad but I think that it takes time for unrest to build it took years for fascism to rise in Italy and Germany. Perhaps 30% unemployment but for just a year or so is even better in this regard than say 12% unemployment for 5 years.

Government is more risky.

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